Tribunal Orders Deletion of Rs. 42 Lakhs from Income, Citing No Cost for Construction Rights; Section 45 Not Applicable.

The Tribunal allowed the appeal filed by the assessee, setting aside the CIT(A)'s order and directing the AO to delete the addition of Rs. 42 lakhs from the total income. It concluded that the right to construct additional floors was acquired without any cost and did not fall within the ambit of Section 45 of the Income-tax Act, 1961. The Tribunal relied on the Supreme Court decision in B.C. Shrinivasa Shetty and a co-ordinate Bench decision in Jethalal D. Mehta, determining that the amended provisions of Section 55(2) were not applicable.

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Issues Involved:
1. Validity of re-assessment proceedings under Section 147 of the Income-tax Act, 1961.
2. Addition of Rs. 42 lakhs on account of long-term capital gain.

Detailed Analysis:

1. Validity of Re-assessment Proceedings under Section 147:
The first issue pertains to the validity of re-assessment proceedings under Section 147 of the Income-tax Act, 1961. This ground was not pressed before the Tribunal and, therefore, it was dismissed.

2. Addition of Rs. 42 Lakhs on Account of Long-term Capital Gain:
The main issue revolves around the addition of Rs. 42 lakhs as long-term capital gain. The assessee, a co-operative housing society established in 1962, owned a building in Mumbai. The Municipal Corporation relaxed development regulations in 1991, allowing additional Transferable Development Rights (TDR) Floor Space Index (FSI). Consequently, the assessee entered into an agreement with developers for constructing additional floors, receiving Rs. 42 lakhs as consideration. The Assessing Officer (AO) noticed that this amount was not declared as income and issued a show-cause notice to the assessee.

The AO argued that the amount received should be taxed as long-term capital gain since the assessee had surrendered the right to construct for consideration. The AO cited Section 269UA and Section 2(47)(v) of the Act, stating that the transaction amounted to a transfer of property under Section 53A of the Transfer of Property Act, 1882, and that the income accrued on the date of the agreement.

In response, the assessee contended that:
(i) There was no cost of acquisition, hence no chargeable capital gain.
(ii) No transfer took place in the year under consideration due to uncertainties in the agreement.
(iii) The agreement was terminable, thus income did not accrue in the year under consideration.
(iv) There was no transfer enabling the enjoyment of the property to the developer.
(v) There was no accrual of receipts in the year.
(vi) Reference to Section 269UA was misplaced.

The AO rejected these explanations, stating that the cost of acquisition should be taken as nil under amended provisions, and assessed the entire sum as long-term capital gain.

The CIT(A) upheld the AO's decision, stating that the right to construct additional area was part of the bundle of rights acquired at the time of acquiring the original land, likening it to the issue of bonus shares. The CIT(A) relied on the Supreme Court judgment in Escorts Farms (Ramgarh) Ltd. v. CIT and dismissed the appeal.

The assessee appealed to the Tribunal, reiterating that:
(i) There was no transferable development right to transfer.
(ii) The transfer was not effected in the current year due to pending formalities.
(iii) No capital gain could be computed without a cost of acquisition.
(iv) There was no accrual of income due to conditions in the agreement.

The Tribunal considered rival submissions and relevant provisions of the Development Control Regulation, 1991. It noted that the right to construct additional floors was acquired without any cost and automatically by virtue of the regulations. The Tribunal referred to the case of Jethalal D. Mehta v. Dy. CIT, where it was held that the right to construct additional floors under the Development Control Regulation, 1991, was acquired without incurring any cost and was not chargeable to tax.

The Tribunal rejected the revenue's contention that the cost of acquisition should be taken as nil under the amended provisions of Section 55. It held that the right to construct additional floors did not fall within the ambit of Section 45 of the Act, and the amended provisions of Section 55(2) did not apply as the right was not covered by any assets specified in Section 55(2)(a).

The Tribunal concluded that the right acquired by the assessee did not fall within the ambit of Section 45 of the Act, and applying the decision of the Supreme Court in the case of B.C. Shrinivasa Shetty and the co-ordinate Bench in Jethalal D. Mehta, the issue was decided in favor of the assessee. The addition of Rs. 42 lakhs was directed to be deleted from the total income.

Conclusion:
The appeal filed by the assessee was allowed, with the Tribunal setting aside the CIT(A)'s order and directing the AO to delete the addition of Rs. 42 lakhs from the total income.

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